SaskTel 2003 Annual Report BRIDGING THE DISTANCE letter of transmittal Regina, Saskatchewan March 31, 2004 To Her Honour The Honourable Lynda Haverstock Lieutenant Governor of the Province of Saskatchewan Dear Lieutenant Governor: I have the honour to submit herewith the annual report of SaskTel for the year ending December 31, 2003, including the financial statements, duly certified by auditors for the Corporation, and in the form approved by the Treasury Board, all in accordance with The Saskatchewan Communications Holding Corporation Act. Respectfully submitted, Honourable Maynard Sonntag Minister Responsible for SaskTel Contents Financial Highlights 1 President’s Message 2 Corporate Narrative 4 Management’s Discussion & Analysis 16 Five Year Record of Service 44 Auditors’ Report 45 Consolidated Financial Statements 46 Board of Directors 66 Corporate Directory 68 Corporate Governance 70 Contact Information 76 financial highlights Net Income Operating Revenues Operating Expenses ($ millions) ($ millions) ($ millions) 125 1,000 1,000 100 750 750 75 500 500 50 250 250 25 0 0 0 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 Net Income for the year was $85.1 million and cash from operating activities was $255.2 million. During the year, SaskTel recorded a non-cash foreign currency translation gain of $22.9 million and investment-related write downs totalling $20.5 million. Income from operations was $112.8 million or $26.7 million lower than 2002. Operating Revenues increased in 2003 due to increased revenues from Navigata and SecurTek and increased cellular, internet and entertainment services revenues. These increases were partially offset by reductions in long distance and data revenues. Operating Expenses were higher than the previous year. Increased spending on growth and diversification initiatives, salaries and benefits, and reduced pension income were only partially offset by reduced contribution and carrier costs, and cost savings of $10 million in traditional business lines generated by the Operational Efficiency Program. Capital Expenditures decreased to $127.7 million in 2003. SaskTel continued to focus on growth and diversification initiatives, such as Max™ Interactive Services, high speed internet, CommunityNet and digital cellular expansion. SaskTel Declared Dividends of $76.6 million in 2003. 1 president’s message Distance and movement have always been a definitive part of life in Saskatchewan. Even before agricultural settlement, the people who lived here knew distance in their very bones. Traveling between winter camps and summer hunts, clans of indigenous people communicated with one another across the plains on pathways that we now trace with our highways and telecommunications. Speeding up the rate that messages and people move along those pathways has left its stamp on our culture, but the challenge of distance remains a defining characteristic. Because SaskTel is in the business of bridging distances within this province and beyond, we are woven into the fabric of life in Saskatchewan. Our name itself expresses this commitment to embrace the distances that characterize our culture. The tel in SaskTel, in fact, has its roots in the Greek word for “at a distance.” More importantly, the people who make this corporation go share with their customers this heritage of overcoming the gulf between town and farm, buyer and seller, home and away. We were raised among the same icons of distance – the school bus, the roads and utility lines leading from horizon to horizon, the open spaces and the sky itself. We know Saskatchewan as a place where it is not uncommon to travel 60 miles to have coffee with a friend, then turn around and head back home again; where the trip the local ball team makes casually every weekend would, in other geographies, involve border-crossings and passports. And today, like our customers, most of us have a significant “elsewhere”that we stay in touch with using the latest communication technologies, whether we are getting the weather report online before we head to the lake on the weekend, sending an e-mail to relatives overseas, or making the “I’ll be home shortly”call on the last leg of a road trip. This year’s SaskTel annual report reflects our role in connecting people and communities across the distances that identify Saskatchewan and its place in the world. That role continues to evolve as we adjust to regulatory and marketplace realities that have shifted our revenue base away from what we once thought of as our core services. But, even when our business plan leads us toward new sources of revenue, Saskatchewan people and communities are the beneficiaries. Since 1987, SaskTel has invested more than $2 billion into creating and building one of the world’s finest telecom networks. We are able to sink that level of investment back into the province precisely because 2 we have a diverse and financially sound revenue base. If we would have stayed strictly with traditional lines of revenue, those financial resources simply would not have been available – and towns like Loon Lake and Frontier would not have access to high speed internet. Which leads us to the most striking recent example of SaskTel’s efforts to link Saskatchewan people to one another and to the rest of the world. In 2003, we completed deployment of high speed internet to a greater percentage of rural homes than any other service provider in Canada. CommunityNet has allowed us to go into communities with fewer than 100 residents. With the completion of this phase we have brought high speed internet service to more than 75% of Saskatchewan residents, and we continue to look for ways to reach our ultimate goal of increasing that figure to 95%. Equally exciting this year was SaskTel Mobility’s launch of the next generation of wireless data technology, called 1xRTT. 1X allows wireless customers to download information from the internet up to five times faster than previously offered speeds. Providing “always on”access, the new technology gives our customers remote wireless access to e-mail, corporate intranets, catalogs, order processing – everything they would ordinarily access from their own office. It also sets the framework for enhanced service offerings that will further improve convenience, productivity, and personalization for our customers. Whether we are delivering the latest wireless technology, digital subscriber line services or plain old dial tone, though, we always keep Saskatchewan and the particular needs of its communities, businesses and families in mind. We are acutely aware that the communication tools we offer – wireline, wireless, internet, broadcasting, and e-business – have become primary ways for Saskatchewan people to shorten the distance between two points. With that awareness comes responsibility and accountability, which, I am happy to say, the SaskTel board, executive and staff served well once again during the past year. Were it not for their day to day commitment, developing, marketing, installing and maintaining the technologies that extend the personal reach of our BRIDGING THE DISTANCE customers around the planet or down the street, Saskatchewan’s great distances would still be the barriers to community and commerce that they once were. Donald R. Ching President and Chief Executive Officer 3 corporate narrative Sharing the wealth – globally and locally A primary source of our wealth as a corporation is the technical know-how we have developed at home and abroad in delivering telecom services to remote areas, regardless of economic or geographic barriers. It might be the Precambrian shield of Saskatchewan’s north, it might be the South China Sea, or it might be underneath the English Channel, but we will find a way to bring telephone and data services to people wherever they move or live. SaskTel International Sharing our expertise with the world has been part of SaskTel International’s (SI) proud heritage right from the beginning. Ask the people of the Kagera region in northwestern Tanzania. In a series of seven fee-for-service contracts over the past 16 years, ranging from the delivery of basic dial tone services to high speed optical networks, SaskTel International has outfitted Tanzania with an array of modern telecom services. Backed by funding from CIDA (Canadian International Development Agency) and international financial institutions, SI has installed communication systems that have greatly improved the lives of Tanzanian citizens. People who once had either poor quality service or no service whatsoever can now call for advice on medical emergencies, take distance education training, and use fax, e-mail, and phone to conduct business. Late in the year, SI received an award for its work in bringing telephone service to the Kagera region of Tanzania. The award, offered by CIDA and the Canadian Manufacturers & Exporters, was for Improvement of Physical or Social Infrastructure. The latest fee for service contract in Tanzania came last year when SI signed a deal worth $2.1 million to rehabilitate outside plant infrastructure in the city of Dar es Salaam and three other cities. The benefits to Tanzania’s economy from SI projects are immediate and varied. In addition to the economic spinoffs from modernized telecommunications, these projects create jobs locally. In fact, SI takes care always to train and use local workforces as much as possible when they work in Tanzania. But there is a very real benefit here too for Saskatchewan. Each of these projects brings revenue back to SaskTel, strengthening our financial well-being and enabling us to invest more in our own telecom network. Over the past decade and a half, SI’s work in East Africa alone has generated more than $58 million in revenue. This kind of success has increased SI’s stature in the international consulting field. In 2003, in fact, a global market analysis on telecom consulting ranked SaskTel International among the top 20 consulting firms in the world.